US Debt Crisis: Is August 2nd a real deadline?

Will it really be a disaster both for the US and the world economy if Congress fails to vote on raising the US debt ceiling by next Tuesday (August 2nd)?

Probably not, say the analysts, adding that even if the federal government is denied the opportunity to borrow more, it can avoid defaulting on its obligations for another week or more after August 2nd.

For weeks, President Barack Obama and Treasury Secretary Timothy Geithner have repeated that the Treasury will have no more flexibility to borrow past the August 2nd deadline and warned of the consequences of failing to raise the debt ceiling, currently set at $14.3 trillion.

But Treasury officials have never said that the government would have no more cash to pay the nation’s bills and Wall Street experts are betting that the US can hold out for about another two weeks before defaulting.

“The first risk of default is on Aug. 15,” predicts Ward McCarthy, an economist at Jefferies & Co. “The cash will not be a problem for right now.”

McCarthy and other financial analysts estimate that the government will be able to pay both $23 billion  in social assistance for the elderly and disabled on August 3rd and $90 billion for Treasury bonds that mature on August 4th.

“In all cases, it appears they have a large stock of cash to cover their commitments,” said Lou Crandall, an economist at Wrightson ICAP.

Is the treasury still credible?

This point of view reinforces the statements from Republicans who have insisted that the government will still function even if there is no agreement by August 2nd.

Analysts at Wrightson and Jefferies believe that the US will first be exposed to the risk of default on August 15th, when the government is scheduled to pay out $41 billion, including $30 billion in debt interest.

According to Barclays Capital, the Treasury may find itself short of cash on August 10th, the day it’s set to pay $8.5 billion for social security and other social programs.

Analysts do not believe that the rating agencies will downgrade the United States’ sovereign debt rating if Congress does not raise the debt ceiling by August 2nd if the government is still able to pay its obligations.

If the government suggests that lawmakers on Capitol Hill have more time to reach an agreement, the credibility of Treasury Secretary Timothy Geithner might be seriously damaged. The Treasury has already modified the deadline after which the government would be unable to borrow three times.

“Elected officials are convinced that even if they pass the deadline, it will be OK,” Tom Simons, an economist at Jefferies, emphasized. Nevertheless, “there will be a time when it will no longer be true.”

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